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Home > Debates Last Updated: 14:34 03/09/2007
Comment (June 20, 2006)

Comment on Professor Kaoru Sugihara's Article "Higher Oil Prices Can Benefit East Asia"

Jonathan Dethloff (University of Southern California)

In Professor Kaoru Sugihara's article "Higher Oil Prices Can Benefit East Asia" , he suggests that over the years, East Asia, especially Japan and the NIE's, has prospered as part of the "Oil Triangle".

In this Oil Triangle, oil is exported from the Middle East and other oil producing nations to East Asia, East Asia then exports manufactured goods to the West (the United States and Europe), with the West exporting arms to oil producing nations. In this way, East Asian economies have grown and their trade deficit with oil producing nations has been offset by their trade surplus with the West. The importance of the Oil Triangle has only increased in recent years, as a growing China is importing more oil while also exporting more manufactured goods to the West.

A key to East Asia's development, as Sugihara mentions, is its energy efficiency, like that in Japan. Due to the lack of resources, East Asian countries have been forced to develop energy efficient economies. As oil prices rise, these energy efficient economies are impacted much less than energy inefficient economies, such as the United States. The rise in oil prices helps rather than hurts East Asia by making it more competitive, as energy efficiency allows for economic production at an increasingly cheaper cost compared to the West.

While this may be true for advanced and energy efficient economies, such as Japan and the NIE's, this does not hold true for industrialized, but still advancing (lagging behind in technology) economies, such as China. This exception is very important considering China's GDP of $2.225 billion (CIA) is the second largest in East Asia and expected to soon become the largest. While China may be helping expand the Oil Triangle, it will not necessarily benefit from the rising price of oil as other East Asian nations. This puts East Asia's prosperity under high-priced oil in jeopardy.

China is less developed than Japan and the NIE's, and with a population of over 1.3 billion (CIA), greater than the rest of East Asia, it is the greatest potential source for growth in East Asia. In addition to this, advanced East Asian countries, such as Japan and South Korea, find themselves exporting and investing more in China, thereby growing through expanding to a vast and somewhat untapped market. Given this interdependence and potential for growth, it is clear that East Asia's prosperity is greatly tied to the prosperity of China.

As said before, China is much less developed than Japan and other NIE's, as well as the West. This also applies to its energy efficiency, an important feature of East Asian economies in Sugihara's analysis. China has often relied on coal to meet its energy needs. In addition to this, China's energy technology lags far behind that of the West and the rest of East Asia. Over the past 50 years, this has not presented too big of a problem given China's large coal resources and its small per capita energy use, especially in the inland rural areas. However, as China's economy develops and expands, its energy needs increase. This is due to both newer, energy-intensive technologies, as well as increased personal energy demand as China becomes richer.

Unfortunately, this increase in energy use has coincided with environmental issues. Chinese cities, such as Shanghai and Beijing, are now finding themselves among some of the most polluted in the world. This environmental issue is partly due to China's long standing dependence on coal, a much dirtier energy source than oil or natural gas. In order to help fight global warming, as well as clean up its own environment and air, China has been imposing stricter industrial and personal emission standards as well as turning to cleaner sources of energy. This need for cleaner energy sources will only increase China's demand for oil.

While China may have vast resources, such as coal and some oil, which makes it less resource reliant than its neighbors, it still must import nearly half of the 7 billion barrels a day that it consumes (BP). High oil prices therefore come at a great cost to the Chinese economy. Recently, China has been trying to offset this burden through purchasing of oilfields in other countries. While this may insure a greater supply of oil, this still comes at a great cost, as China often overbids for these oilfields and must still sacrifice the value of oil through its consumption over its sale on the world market (Blumenthal).

Ironically, China's growing demand for oil is one of the factors driving the rise in oil prices. Since 1996, Chinese oil consumption has more than doubled, accounting for 30% of the growth of world oil consumption (BP). Rising oil prices have also forced China to support undesirable governments in exchange for oil (Blumenthal). The actions of the governments in these oil producing nations, such as Iran, Sudan, and Nigeria, have increased fear concerning oil supplies and thereby increased the price of oil (Blumenthal). Thus, China's quest for oil has helped lead to the high prices which China must pay.

While China may be developing along more energy efficient lines than oil producing nations, it still lacks the capital and technology to achieve the energy efficiency of its neighbors. For example, due to equipment costs, China is forced to construct coal power plants that are 20-50% less efficient than modern coal plants (Bradsher). All of this means that China, unlike much of the rest of East Asia, will be unable to benefit from higher oil prices, and will actually be hurt by them. Already the Chinese economy is slowing, with at least some of this slowdown due to insufficient energy supplies.

Though higher oil prices can be beneficial for energy efficient economies, such as Japan and the NIE's, it is detrimental to developing and advancing economies such as China. And given China's key role in East Asia, rises in oil prices are not necessarily going to increase East Asian prosperity. They are more likely to add to China's growing pains. However, this will not end China's growth, but should rather lead to more modest, and hopefully more energy efficient growth. As energy resources start to dwindle around the world, this modest path will eventually end up helping the Chinese economy stay healthy and competitive in the future.

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